The Persimmon (LSE:PSN) share price tanked again last week. Investors headed for the exits following an alarming trading update and the company’s decision to slash dividends.
At £12.50 each, Persimmon shares now trade on a forward price-to-earnings (P/E) ratio of 11.3 times. They also command a mighty 5.9% dividend yield for 2023.
As a fan of value stocks I’m looking closely at the FTSE 100 housebuilder and wondering whether now could be the time to top up my holdings.
Completions tipped to sink
Persimmon shares sank last week as chief executive Dan Finch cautioned that “completions will be down markedly this year and… so will margin and profits”.
The firm warned that home completions could fall as low as 8,000 in 2023 if current sales rates continue. This would mark a huge departure from the 14,898 properties it sold last year.
Sales rates averaged 0.69 per outlet per week in 2022 but slumped to 0.3 by the fourth quarter. This reflected the steady rise in mortgage rates and a decline in consumer confidence.
Persimmon’s sales rate picked up to 0.52 in the first eight weeks of 2023. But the busines warned that “the market remains uncertain” and so it decided to take a hatchet to the full-year dividend. This fell by almost three-quarters year on year to 60p per share.
Squeezed on both sides
Britain’s housebuilders are in a tight spot right now. Building society Nationwide reported last week that average home values reversed 1.1% in February. This was worse than expected and represented the biggest decline since 2012.
With high inflation persisting and the economy struggling it’s not difficult to imagine that home prices will keep declining. This will keep margins at Persimmon and its peers under pressure, as could elevated levels of cost inflation.
Persimmon’s underlying operating margin dropped to 27.2% in 2022 from 28% a year earlier. For this year it warned that it could fall another 500 basis points if cost inflation remains at current levels of 8%.
Moreover, it said that lower sales volumes, increased buyer incentives, and larger marketing costs might drive the margin down by another 800 basis points.
To buy or not to buy
I believe the long-term investment case for owning housebuilder shares is strong. As the population grows, the UK’s whopping homes shortage looks set to worsen. This means there’s a strong chance Persimmon will deliver big returns to patient investors, at least in my opinion.
But that doesn’t mean I plan to top up my holdings in 2023. I think there might be better options for me to generate passive income in the near term.
This year’s predicted dividend is covered just 1.5 times by expected earnings. This is well outside the widely regarded safety minimum of two times.
Persimmon might also prioritise conserving cash as the housing market cools and its balance sheet comes under strain. Net cash fell by almost a third year on year during 2022, to £861.6m.
There are plenty of UK dividend shares I can buy to boost my passive income this year. Right now I think I’d be better off avoiding Persimmon and investing elsewhere.
